Identifying Potential Fraud and Embezzlement in the HOA

We like to believe that everyone is fair and honest, but unfortunately fraud and embezzlement can happen when individuals are in charge of or have access to large amounts of money. The HOA is no exception. Effectively managing financials is important for the future of the HOA and to ensure that there are adequate funds to cover current and upcoming expenses. Putting in place a set of checks and balances and providing financial training to HOA board members can help reduce risk of fraud or embezzlement occurring or going undetected.

Here are some warning signs that may indicate something is amiss:

Vendor addresses are within the community or are a P.O. Box. While some businesses do use P.O. boxes, many use a street address. And to avoid conflict of interest, HOAs do not typically contract with vendors who are also homeowners within the association. Look into suspicious addresses to confirm money is going where it should be.

Multiple payments to a one-time vendor. If the association only used a vendor once, it can raise a red flag when multiple payments are made and should not be. This could mean that someone is using the vendor as a cover to funnel these funds to themselves.

Payments for consulting or services that were never received. Any consultants should be approved by the board and not take place at the discretion of one or two people. And while some services are paid for advance, it is usually preferred to wait until services are rendered to ensure they’re completed in full and correctly.

It takes a long time for deposits to be processed. Banks are pretty quick when it comes to processing transactions, so if it takes several days – or weeks – for a transaction to appear, this could be a sign of something fishy going on.

Copies of invoices are used instead of originals. In most cases, the HOA should have the original invoice, not a copy. Copies may indicate that someone is altering these documents or replacing them with fake ones to cover up missing money.

Take steps to protect the HOA from fraud:

Carefully review financials on a regular basis. Make sure that invoices and payments match. Have one person in charge of invoices while another double checks these against services or supplies rendered. Always have more than one set of eyes reviewing things.

Increase training. Mistakes happen from time to time, but there shouldn’t be regular discrepancies in funds. Make sure that anyone handling financials has been trained to do so. The HOA may also want to hire a professional to help manage the books or make sure things balance out.

Limit access. Only those who need access to bank accounts, checks, or credit cards should have them. Consider requiring two signatures on any checks that are written so there is always additional oversight. In addition, the person writing the check should not be the one who signs it.

Putting safeguards and extra checks in place can help the HOA to better protect its funds from fraud and embezzlement. If your HOA is concerned about its financials, talk to the professionals at Kuester to find out how partnering with a property manager can help.